~ Mish's Global Economic Trend Analysis

Get Mish!

Massive Cascade of Eurozone Defaults Coming Up

As soon as any major country exits the Eurozone (and possibly some lesser ones), a cascade of defaults, unparalleled in history will commence.

The only way to stop such a cascade would be if the ECB guaranteed (printed) enough euros to cover losses. Meanwhile, the already high Eurozone default risk keeps rising.

From Eurointelligence via Email.

German Target2 Surplus is fast approaching the one trillion

Each month, Germany’s Target2 surplus has been rising. The Bundesbank yesterday published the data for end-February, showing a new record of €814bn, up by a further €20bn during the month. This level is now significantly higher than it was during the peak of the eurozone crisis. We would assume that the rise in the German surplus will be offset by parallel rises in the deficits of Spain and Italy, which were €350bn and €364bn in January. The rise is in part explained by the ECB’s asset purchasing programs – the sales of Italian bonds by London-based investors often clear through Frankfurt, but the investors generally do not reinvest in Italy, but elsewhere. In other words, the QE program is the direct cause but it hides an underlying trend of capital flight out of Italy of the same scale as during the crisis.

Frankfurter Allgemeine, which watches over the Target2 surpluses like a hawk, has a revealing comment by Jens Weidmann. The Bundesbank has generally tried to distance itself from the position of some German economists, who have emphasised the importance of the Target2 system. That’s still the official position. Weidmann said that he agreed with Mario Draghi that a country that exits should settle its Target2 liabilities in euros. But then he made an important qualification:

“What that looks like in practice, and whether a government was willing or able to meet these claims, is a wholly different issue altogether.”

We see it exactly the same way. Any exit would cause so much financial stress, and give rise to such political recriminations on both sides, that it is inconceivable that these balances would ever be paid up. This is why a euro exit invariably constitutes a series of massive defaults – without parallel in economic history.

Default Cascade

Some may be wondering what is it that would cause a cascade of defaults. The answer pertains to the Eurozone treaty which designates the ECB itself cannot cover defaults or bail out nations.

If the ECB cannot print (ultimately I believe they would), then taxpayers would have to come up with a way to fund the insolvent national central banks.

For example, if Italy Italy left the Eurozone and paid back €364 billion of Target2 liabilities in Lira at a 40% discount to the Euro, where does the money come from?

And might not Italy be tempted to just declare the entire amount null and void?

Clearly, such discussions are on the table.

Assuming Italy walked, and assuming the ECB did not paper over the losses, then the remaining countries would have to come up with the euros, perhaps in accordance with EFSF or ESM weights.

Where would Spain, Greece, France, etc. come up with their share of such a mess?

The answer is they wouldn’t.

And that is precisely what Jens Weidmann, president of Germany’s central bank meant when he stated: “What that looks like in practice, and whether a government was willing or able to meet these claims, is a wholly different issue altogether.”

Here is a bit of laughable propaganda on bailouts.

Fatal Eurozone Flaws

No fiscal union: No currency union without a fiscal union has ever survived

Target2

Treaty requires unanimous approval to make anything but a minor change

Single interest rate policy cannot possibly be suitable for countries with varying degrees of productivity

There is no way to fix this mess, and no way to stop the imbalances from growing until it all blows sky high in a massive cascade of defaults (or papered over by the ECB in a treaty violation).

Related

About Mish

Post navigation

Disclaimer: The content on this site is provided as general information only and should not be taken as investment advice. All site content, including advertisements, shall not be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of sponsors or firms affiliated with the author(s). The author may or may not have a position in any company or advertiser referenced above. Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.

58 thoughts on “Massive Cascade of Eurozone Defaults Coming Up”

The future brings a United Sates of Europe. The price is being paid now.

So long as it doesn’t involve war to get there tptb think its justified and the monetary problems a price worth paying.

This is no joke or glib comment. Deep in the bowels of the system the rough path to the USE was outlined and is now being executed upon. Birthing pangs, USA had war of independence, USE will get there without bullets.

If Schulz wins in Germany he will preach solidarity to get the German tax payer on side. A German tax payer that has no choice, no alternative, whatever they may think. No political alternative between Schulz and Merkel and no real financial alternative.

Schauble has already thrown treaty in the bin, mentioning tax cuts to fuel demand as opposed to reducing of debt to 60% using the surplus. A subtle message. Debt ratios can be ignored, demand creation and reflation more important. Merkel probably gave the same message to France, Spain, Italy at the recent core4 meeting.

Reflate, ignore deficits, go for whatever growth you can and Germany will relax about it.

Watch this space and be positioned, tilt to Europe in investments imho.

ECB a little more hawkish as the Germans relax. When Germans up-tight, ECB dovish.

Collapse will not be allowed and Germany wont allow it.

It might happen in the distant future but not for a few years and by then they will be even closer to the USE target structure.

Not that simple. It’s not only banks that lend money — Insurance companies and Pension Funds are vastly exposed to debt instruments, along with Mutual Funds and others. A debt Jubilee would bankrupt most insurance companies (and devastate associated savings products) while pensioners would find themselves retiring in abject poverty.

Frankly, it’s the morons and speculators who borrow to get rich that I would like to see crushed. Plenty round my way: borrowing to the eye-balls to buy ‘investment property’ in the hope of getting stupidly rich (who wants to work hard to make money, after all?). Those are the people who deserve to spend the rest of their lives in poverty, not the guy of modest means just squirrelling away a few bucks every month.

The Defaults will happen……..there is 3tril$ of periphery debt………the US TaRP was .6 tril$ and will not be repeated…..if they print the euro to cover it, the dollar will rise so much all foreign debt in dollars will be unplayable……..
The crisis will make 09 look like a garden party……it will by no means be isolated to anywhere.

Nominally at least, you are for sure right. Just issue bonds with zero payment for the first 100 years. Then a balloon. Then, allow banks to treat such bonds as “risk free,”money good. So that all those holding them, can borrow against them in current Euros…..

Then roil up the dittoheads, claiming that the can kicking you are so patriotically engaged in, is creating a poison pill that the UCE (United Caliphate of Eurabia) will be the ones stuck dealing with. That should get Le Pen on board.

If you’re playing poker and you can’t figure out who the sucker at the table is, it’s you. That which cannot be repaid won’t be repaid, so we will eventually find out who the sucker is that Mario has in mind.

The plan has always been to collapse the “democratic republics” of the 1st world western nations and do to them what has been done to every other nation that tried to exert control over their own money supply, their own industry, and their own government.

The WHITE (formerly Christian) middle classes are already destroyed in every way imaginable. And not by accident.

And when the dust finally settles…….

“If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered…. I believe that banking institutions are more dangerous to our liberties than standing armies…. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.” Thomas Jefferson

Americans and most of Western society has been indoctrinated with self hate for decades. We have been preached to by our progressive media and education systems of our foundations of sin that we had previously believed was our pride and greatness. Most of our historically great leaders have been denigrated as racist haters with possibly their only redemption in rumors of homosexuality.
Further we have been told that our reproduction was a threat to the planet while meanwhile spending untold amounts to save the children in nations of prolific reproducers lacking any means of self sustenance like Africa. Now they tell us our geriatric western soçieties will die without massive influx of the third world massively overproducing people, many hateful of our generous societies, because we need them to “enhance” our genetically limited future and provide needed labor to sustain our social entitlements.
Are we REALLY that stupid?
On top of that we have endeavored to bring every backward nation of the world into direct competition with our own citizens while telling us how good we should feel about ourselves…while also rewarding us with copious quanties of cheap goods…..and of course we are told the same about illegal immigration.
This is about suicide, about convincing the victors that they are unworthy cheaters, haters and racists, who must surrender their success, destroy themselves by putting themselves into the hands of their “victims” who happen to also be some of the most self destructive groups in the world, in their own right.
This is about a new world order that will replace the old. No more nationality to unify people for their own advancement. Instead, globalism, a borderless amalgam of defeated and divided people unable to unify for any cause of advancement, ALL ruled over by a select few self appointed elites who will OWN ALL MEANS OF PRODUCTION.

and the struggle against this is what we are beginning……..the globalists will lose in the short run…..the EU will come apart starting the sovereign debt crisis ……..what is left to be decided is what happens when debt is no longer money……..who wins when things are tough……..who will the people turn to and what will they want………a return to obamaphones or realistic sound policy………..more handouts or the right to work for their own future.

if the easy-pie-in-the-sky-handout group wins out we are in for a very dark period of history…….because as the socialists will no longer be able to use debt, they will turn to conscription and confiscation.

Informed people understand the obvious collapse of the euro and EU, but fail to think of the implications. Where is the smart money in euro-based assets going to go? What happens when the dollar and rates keep rising? People should be careful what they wish for, or at least think through the consequences when their wish come true..

I did not mean to imply what is happening in Europe is not deserved or unpredicted. There were smart people, like Thatcher and Armstrong, that warned from the beginning that the euro would fail if debts were not consolidated so a treaury-like debt instrument could be sold.

My warning was aimed at traders and investors who think linearly and are US-centric. The people of Europe, Japan, and the US who have been complacent and trusting of politicians are reaping what they sowed.

The countries that have suffered from a higher currency, especially those that depend on tourism like Greece and Italy, should not only wish for the collapse of the euro, they should get out now before it does implode.

Yields on Italian 10 yr bonds have been consolidating for the past 6 weeks. Today yields moved to the upside and broke the upper trendline. The next surge in yields is beginning. And it’s not just in Italy. US bonds are about to break strongly to the upside. The FED will have no choice but to raise rates to maintain any credibility.

It is false economy (aka FRAUD) to claim the ECB printing currency avoids default. It only avoids an accounting loss, the loss in purchasing power remains (and gets suffered disproportionately by savers).

The last time Europe decided to stick it to Germany (the Versailles Treaty) — it set the continent up for unimaginable suffering. This time will not be different.

I don’t know why Mish appears to be buying into this “ECB printing guarantee” fraud, but it is nonsense and highly deceptive. Europe has more debt than they are able to repay, and therefor a massive default is inevitable. Parroting this “central planner’s can bail us out with printing press” just makes a really bad situation worse

A country borrows in Euros, it leaves and cannot repay those Euros ( it would destroy the new currency and the its economy to buy Euros to make payment in Euros) , it can only offer to redenominate that debt into its own new currency at a fixed rate. If that is accepted exit can happen something close to smoothly, creditors would have to accept being paid in what would likely become weaker currency.

If a country plain defaults, the EZ would have to recognise the losses on unpaid debt. It would be realised that EU and ECB never had the ability to guarantee the fulfilment of obligations, and so the meaning of the Euro will be viewed for what it is – an office somewhere that has no jurisdiction, which for some unknown reason various countries placed their national currencies into its hands in exchange for using its own unit, one that would obviously at that point be understood to be without any foundation whatsoever – fiat is is an order, but that order is only issuable by a state, one that has physical and bureaucratic control of the domain where that order is to be applied.

Of course the ECB can reset the accounting, but what it would be saying is ‘ using our currency is brilliant, when someone doesn’t pay everyone else pays for them ‘. However the ECB knows this will not be accepted as a reply by those who would be covering the cost, so instead it will point to the country that has left with the word ‘ outstanding ‘, and the country that has left will reply modestly ‘ oh, it was nothing’.

The system in its current form is quite obviously doomed. The only real question is how will it play out– here’s my thought. A few days after the meltdown starts and the markets are essentially beyond hope, a “banking holiday” will be announced; ATM wthdrawls and/or purchases will be limited to perhaps $100/day. Congress, the President & the Fed will gather and decide how best to reboot the entire system before the shelves at WalMart go empty & the riots begin.

1. All debts will be eliminated.
2. Everyone not working will get a basic income, say $500/mo
* Mothers with kids will get twice what individuals get, say $1000/mo
3. Rent {for those who don’t own} will be limited to 50% of your income.
* You cannot be evicted for non pymt so long as you pay the 50% nor
can you be evicted if your lease ends & tenant wishes to stay.
4. The banks will begin lending to companies.
5. Everyone will be eligible for bare bones MediCare program.
6. Immigration will be stopped.
7. Those with money in savings,checking or CD will be covered to a
maximum of $20,000 per person.

In time, the economy will recover, people will begin to take out too many loans, and the process begins anew.

Problem seems to me to be that there is no PLAN. If we want to stop chaos there needs to be some arrangement whereby the government takes over all distribution of goods before the shelves get emptied. They need time to get rationing up and running. Probably the Army will get the job to maintain control of the essentials.
Re the debt. the wipe out will be a debt jubilee like never before seen.Banks will lose all their mortgages. Punters will all be out of those sorts of debts. Might as well be thorough. The banks won’t be able to sell any defaults when everyone is caught up. But if the electric grid goes down all fiat money will disappear in a flash. 97% is only numbers in accounts now. There will ne no recovery when that happens.

Wolf Street reported today on a move by Germany’s Merkel and Finance Minister Schaeuble to create a “European Monetary Fund” out of the current Luxembourg-based European Stability Fund. The EMF would be empowered to create Euros in infinity, and engage in unlimited bailouts.

This could be a Hail Mary throw to put all Eurozone finances under German control, and prevent further exits from the EU.

Makes no difference. All the periphery are so weak they can do nothing except comply. That was the plan set out. Trichet, or one such, said so. They know/knew exactly what they were doing. It is one of the tools to create the integrated Europe.

It’s all coming together as planned. No surprises, No need for incredulity. Expected.

Too disconnected, the macro positions are impressive and organized but go to just about anywhere and you will find that the closest local national official ( of whatever kind) knows approximately nothing about what is really going on in his neighbourhood, about what people feel and think. They view the world through law and physical proximity to their plans, they count numbers and people, and think by projecting ‘truth’ to them via media they have solved the rest. Too stupid, but what is an individual to do when he walks out the door and he finds himself in a framework he does not agree with? That is not weakness – because individual actions in the real world have immediate real effects on those not sat in an office giving orders, you must expect that society to be cautious, to meditate, and to form deep sentiments that will be expressed at a given opportunity, usually en masse where fear of retribution is less – voting or revolution.

The future brings a United Sates of Europe.
The price is being paid now.

So long as it doesn’t involve war to get there tptb think its justified and the monetary problems a price worth paying.

This is no joke or glib comment. Deep in the bowels of the system the rough path to the USE was outlined and is now being executed upon. Birthing pangs, USA had war of independence, USE will get there without bullets.

Mish. I hate the EU with a passion, but much as I want it to fall apart, it won’t happen. There are too many vested interests with big expense account, salaries, and pensions, working to keep the show on the road that IT WILL NOT HAPPEN! No matter how much the nations and people’s of Europe are hurt, particularly the youth, IT WILL NOT HAPPEN!! (Remember, you read it here!)

I agree and anyone standing in the way will be vilified, sidelined or worse.
Nothing will be allowed to stop it.

Worse case I see any peripheral uprising being allowed to lead to massive impoverishment to teach others a lesson or, in future, suppression via an EU force.

You ain’t seen nothing yet.

I still think it will lead to that which they hope to avoid – conflict. Not state vs state but periphery/regions vs centre. Give it a few years and some will want control back and to breakaway. By then only force will enable a breakaway. There are examples of the type of things in the Basques vs Spain etc.

Any kind of response, like the break-up of the country, or regions, requires action by people. So far, the Sheeple have not even been able to vote out a few hundred bribed, corporate owned politicians in congress.

The electorate keeps voting for the candidate that spends the most money. That’s the one annointed by the establishment.
Maybe the Millennials will be the generation to step up.

Trump, flawed as he is, shows a glimmer of hope that people may be waking up a bit.

But the president doesn’t have that much power. Congress is where the problem lies. The fact that we can’t seem to change that reflects strongly on those who elect these people.

You do not know your history. Govt cannot force people or businesses to spend, which leads to depression and people losing everything, and when you have nothing to lose, you lose it. Greece, Italy, and other PIIGS will leave the euro, and France and the Netherlands may beat them to it. The EU may exist, but not in its current form.

I bet you also believe that the break up of the USA will never happen. If you make it to 2032, you will also see that beliefs and biases are often wrong.

The outcome will be violence. I have no idea what the USA will morph into just that the EU will do whatever is necessary to keep on Trucking including suppression of dissent.

They have ignored democratic decisions in the past & openly say people in the member states should not be asked their wishes/wants/opinions. A progression is to putting down rebellion/revolt. Just a matter of time once they have their own army. Different nationalities wil be stationed in each area – Dutch in Italy, Italians in Denmark so they won’t side with locals etc. Any dissent, peace will be kept.

The flaw is that there is no central government that has authority to do fiscal transfers like in US. Yes, the same minimum wage laws and similar standard of living required but it is flawed because the EZ governments are not currency issuers like they are in US, Canada, Australia, UK etc. TARGET2 is just a payment system. To say that TARGET2 is flawed is a little odd. It is a payment system designed for this flawed monetary system. Euro is a perfect example of what happens when you separate money and governments. That is not to say that governments don’t mismanage economies and haven’t done so in past. Greece would not be in this mess had they used their own drachma, exchange rate would have gone down, governmment would have deficit spent during financial crisis and this nightmare would have been forgotten long ago.

This is exactly why currency unions have failed historically. You cannot manage the high unemployment and economy underperforming politically, there is going to be a revolt.

As far as euro goes, there is not even a small chance that It will survive in long run. All they have been doing is kicking the can down the road. It cannot be fixed in a way that is satisfactory to the electorate. The people who are saying that nationalism is not the answer and Euurope needs reforms donõt usually have anu idea what kind of reforms or what kind of political reality wouuld be required for these reforms.

Interesting thing about euro is that technically there is nothing wrong with It. All the issues are political/moral. Member state government debts no matter how large get financed if it so politically decided. The risks are not financial. Member states start complaining when Greece is running trade deficits and demands that ECB finance it all. Yet no one in America is complaining about New Mexico running trade deficits and central government doing fiscal transfers.

Thanks Kristjan. For me, your post is excellent and clears a bit of the fog as far as I am concerned.

You highlight, in a very credible way, the political reality that is required to sort out the situation. So I guess the question is: Will the political reality needed to keep the Euro going, and thus the EU bandwagon on the road, ever surface? I guess that translates into: Will the Germans ever agree to transfer the wealth that is needed to correct the imbalances? My answer is: If Germany is storing up huge surpluses, Schultz or Merkel, whichever is in power, will just go ahead and do it, regardless of what the average German thinks/wants, because it will just be a meaningless hole in those surpluses, and the move won’t directly affect the “German on The Street”; there will be a lot of fuss, but no real effort to stop it.

Target2 nets how much one country has invested in others…it ‘does not matter’ as long as the redemptions continue. The main risk is sovereign default/exit and also financial crisis.

Sovereign funding is also taken care of. ECB purchases of sovereign debt bring the yields into line and keeps borrowing affordable.

So where is the problem?

The problem is a mixture of politics and post bubble adaptation.

You are talking of Germany paying.

Paying what?

Itself. It would be using its surplus to buy out government in debtor countries, imposing budget rules, shaping politics in foreign nations. The process would give more control over guaranteeing repayment, on adapting the other countries to a German model.

So the whole façade of ‘what shall we do? ‘ is invented, and it is being used as pretext to take control.

Southern countries know this, which is why many reject the Euro.

It has destroyed much of their societies.

Germany is not virtuous, it will use money to tempt who it can, to design profit, will agree to oppressive measures to force compliance. Other countries are slack and let themselves be persuaded.

Fiat is the forceful will of the issuer. Technically, in Europe ,it was reserved to a national authority directly elected by a group of people sharing common close historical, cultural and linguistic traits – a country. The value of the will of different countries was traded between themselves in the form of currency, this gave exchange rates, which were a signal to the individual countries and a reality in terms of their prosperity with regards to their neighbours.

The Euro is technically flawed – it accomplishes only part of the necessary function of a national currency, and allows those that deserve not to empower themselves of the rest.

Those of us who have doubted and repeatedly predicted the collapse of this so-called recovery remain wrong because we have underestimated both the breadth and size of the global intervention of central banks and governments. Nobody in their right mind would have ever anticipated the sheer magnitude and scope of what has become a worldwide phenomenon. The article below questions when the burden of global debt will cause Atlas to shrug.

Atlas has already “shrugged” and now the consequences are being felt; and Alan Greenspan played “John Galt” the whole time he was Fed chair; only instead of working surreptitiously, behind the scenes as Galt did in the novel, Greenspan pulled it off IN PLAIN SIGHT, with the WHOLE WORLD WATCHING. Tell me with a straight face he didn’t “…. stop the motor of the world.” As they say in the Guinness ads….. “BRILLIANT!”

Subscribe via Email

Enter your email address to receive notifications of new posts by email. Note: You'll have to confirm your address after sign-up. Please check your spam folder if you do not receive a confirmation email.